Transcript Module Exchange Rate Policy

Module 43
Exchange
Rate Policy
KRUGMAN'S
MACROECONOMICS for AP*
Margaret Ray and David Anderson
http://www.bloomb
erg.com/markets/c
urrencies/
What you will learn
in this Module:
USD
EUR
JPY
GBP
CHF
CAD
AUD
HKD
USD
–
1.2570
0.0124
1.5588
1.0469
0.9760
1.0064
0.1289
EUR
0.7955
–
0.0099
1.2401
0.8331
0.7762
0.8005
0.1025
JPY 80.4300 101.1100
GBP
0.6414
0.8064
– 125.3800 84.1830 78.4930 80.9450 10.3630
0.0080
–
0.6714
0.6260
0.6456
• The difference between fixed exchange
rates and floating exchange rates
• Considerations that lead countries to
choose different exchange rate regimes
0.0827
6/22/12
Exchange Rate Policy
• Governments have more
power to influence nominal
exchange rates than other
prices
• Exchange rates are important
to countries where exports
and imports are a large
fraction of GDP
Exchange Rate Regimes
•Exchange Rate Regime
•Fixed Exchange Rate
•Floating Exchange Rate
•"Managed" & "Target Zone"
How Can an Exchange Rate Be
Held Fixed?
•Exchange Market
Intervention
•Foreign Exchange
Reserves
•Foreign Exchange
Controls
The Exchange Rate Regime
Dilemma
•The Case for Fixed Exchange Rates
• Facilitates trade by creating certainty about the
exchange rate
• Acts as a check on inflationary policies
The Exchange Rate Regime
Dilemma
•The Case against Fixed Exchange Rates
• Requires large foreign currency reserves
• May divert monetary policy
• Distorts incentives
• Opportunity for corruption
Figure 43.1 Exchange Market Intervention
Ray and Anderson: Krugman’s Macroeconomics for AP, First
Edition
Copyright © 2011 by Worth Publishers